So where are NZ interest rates heading with the central bank due to release its latest decision on monetary policy three weeks yesterday?
Lower is the emerging bet after the New Zealand dollar fell to new five-year lows yesterday and global dairy prices reached six year lows in the latest worldwide auction held on Wednesday night.
And rates will go lower, even though NZ property prices had another strong month in June, due to the continuing boom in the hot Auckland market.
We have been pointing out for most of this year how world dairy prices were falling and that this would eventually catch up with the booming NZ economy and crunch it.
The Reserve Bank of NZ spent a long time wondering about the impact of falling dairy prices (especially as Fonterra, the dairy giant, kept cutting its forecasts and dividends for most of the country’s dairy farmers) and the $NZ 5 billion it would cut out of national income in 2015-16.
Last month the bank blinked and cut its cash rate by 0.25% to 3.25%, and this week a succession of economists have upped the ante, saying there will be another cut on July 23 and that by the end of this year, 2014’s four rate rises will have been reversed.
In the latest Global DairyTrade auction on Wednesday, the price for whole milk powder dropped nearly 11% to $US2,054 a tonne and overall dairy prices fell 5.9% to a six-year low of $US2,276 a tonne.
These falls mean the average global price is now 60% under the April, 2013 high – matching the sharp fall Australia has experienced with iron ore prices in the past year.
The Kiwi dollar fell under 67 US cents yesterday morning for the first time since June 2010. And the S&P/NZX 50 Index rose 47.11 points, or 0.8%, to 5841.46.
That left the Kiwi dollar down more than 14% so far this year, most of that fall occurring in the wake of the RBNZ’s rate cut on June 10.
That in turn has stopped the crowing across the Tasman about parity with the weakening Aussie dollar, which if anything has maintained its value at around 76 US cents as the Kiwi has dropped.
Of course the weaker dollar is something the RBNZ and the Kiwi government have been wanting to see and that will offset weak inflation and the slide in prices for dairy and other exports.
The NZ economy maintained solid growth in the March quarter (the annual rate was 3.2% in the year to March), but the slide in dairy incomes has hardly started to have an impact. But business confidence has fallen to a four year low.
In its June rate cut announcement, the RBNZ made it clear that that further rate cuts would happen, if deemed “appropriate”.
The only factor that will make the central bank hesitate will be the continuing property boom and the June data showed the fastest growth rate for 18 months.
Prices rose 9.3% in the three months to June 30 from a year earlier, according the Quotable Value index (a government-owned property research group). This was up from a 9% pace in the three months to May.
Prices in the hot Auckland market were up 18.3% year-on-year in the three months to the end of June, from the 17.7% rate in the three months to May. That’s like Sydney where house prices were up 16.2% in the year to June, while capital city prices were up 9.8% (Melbourne’s prices were up by just over 10%).
But Auckland’s rise was more that four times the growth rate of the next best performing area – the city of Hamilton where there was a 4.4% rise
The Reserve Bank of New Zealand will push ahead with rate cuts though in spite of the surge in Auckland after tightening loan-to-valuation ratio (LVR) restrictions for the Auckland housing market by doubling the deposit for investors, while the government has tightened tax and other rules to make it harder for speculators to avoid tax.
For that reason (the higher deposits don’t take effect until October 1), the RBNZ is expected to again cut rates, having cut them in June for the first time since March 2011.
